TechTarget Inc (TTGT) 2018 Q2 法說會逐字稿

Good day, and welcome to the TechTarget Second Quarter 2018 Earnings Release Conference Call and Webcast.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Charlie Rennick, General Counsel.

Please go ahead.

Thank you, Phil.

Before turning the call over to Greg Strakosch, our Executive Chairman; and Mike Cotoia, our CEO, I want to remind everyone on the call of our earnings release process.

As previously announced, in order to provide you with an update on the business in advance of the call, we have posted our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K.

Also joining us on the call today is Dan Noreck, our CFO.

Following Greg and Mike's remarks, the management team will be available to answer your questions.

Any statements made today by TechTarget that are not factual may be considered forward-looking statements.

These forward-looking statements are based on assumptions and are not guarantees of our future performance.

Actual results may differ materially from our forecast.

Please refer to our risk factors in our annual and quarterly reports filed with the SEC.

These statements speak only as of the date of this call, and TechTarget undertakes no obligation to update them.

We may also refer to financial measures not prepared in accordance with GAAP.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure accompanies our shareholder letter.

With that, I will turn the call over to Greg and Mike.

Great.

Thank you, Charlie.

We delivered record revenues, adjusted EBITDA and margins in Q2.

Highlights include: revenues were a record $31.5 million, up 18% versus last year.

Revenues from Priority Engine increased by more than 60% in Q2 versus last year.

Revenues from our core offerings increased by 20% in North America and 16% globally versus last year.

34% of the -- of our revenues in Q2 2018 were derived from longer-term contracts, up from 21% in Q2 2017.

Gross profit percentage expanded to 77% in Q2, up from 73% in Q2 of last year.

Adjusted EBITDA was a record $9 million in Q2, up 74% versus last year.

Adjusted EBITDA expanded to 29% of revenue in Q2 compared to 20% of revenue last year.

Incremental adjusted EBITDA margin was 80% year-over-year and 92% sequentially.

Today we are raising our annual adjusted EBITDA forecast to be between $30 million and $32 million.

The original adjusted EBITDA forecast for 2018 was provided on February 7, was for annual adjusted EBITDA to be between $28 million and $30 million.

On May 9, 2018, the annual adjusted EBITDA forecast was raised to be between $29 million and $31 million.

For the full year, we are reaffirming our 2018 revenue forecast that was raised on May 9, 2018, for revenues to be between $122 million and $124 million.

Overall, our customers continue to be focused on using data to make their sales and marketing organizations more efficient and competitive.

Customers that are executing well with our data are seeing outsized results.

We are very optimistic about both our short-term and long-term opportunities, especially as the IT spending environment continues to improve, which will continue to result in healthy revenue growth and even higher profitability as our margins continue to expand.

I will now open the call to questions.

(Operator Instructions) The first question comes from Brian Fitzgerald with Jefferies.

A couple questions, maybe looking at a higher level given the current environment and the increasing crescendo of talks on tariffs.

How have your clients reacted to the overall -- to their tech spending?

And how do you think that -- as you view those tariff conversations, how do you think about that in the back half of the year?

And then maybe 1 other one, with GDPR, it feels like it presented more of a tailwind for you guys as you are using co-opted data to drive purchase and intent-driven marketing.

Was that more a kind of near-term, couple-weeks type of tailwind?

Or any lasting impacts from GDPR?

And how it played out?

Brian, this is Mike.

I'm going to -- I'll answer your question.

I'm going to answer the GDPR question first, if that's okay.

In terms of GDPR, the way we have our business, we own and operate all of our sites, and which means we also own and operate all the registration process.

So everything is 100% opt-in and consent-based.

So as the EMEA laws came out with GDPR, there's always a little bit of a delay and some cautiousness on the side of our vendors.

And we've been through this before with the Canadian CASL laws.

So we're very proactive in terms of how we are making sure our customers feel comfortable with our opt-in and our consent-based registration form.

So in the short term, it definitely causes a little bit of headache for everybody.

But it did provide us with a competitive advantage, and I think moving forward, it will continue to provide us with a competitive advantage.

Because, again, going back to owning and operating the sites in the communities, understanding and operating and owning the registration process and 100% of our audience being opt-in and consent-based, is a real positive attribute for us.

And I think it'll be very challenging to a lot of, we'll say, like, list providers and contact providers out in the market.

So we see that as a continued opportunity for us.

In terms of the overall IT market, we've seen a healthy pickup in IT spending, which has created healthy budget increases from our customers.

We reported across all of our customer segments from our global -- top 10 global accounts to the next 100 to all other accounts being up 19%, 15%, 25% year-over-year.

So we're seeing a good healthy trend across that.

We're also starting to see the impact on the -- the full impact on the tax regulations and companies allowing -- being allowed to expense big IT expenditures in year 1. We've not done the full year on that, so we continue to see some improvement on that, and that bodes well for the business.

In terms of the tariff conversations, we really haven't seen a lot of headwind on that.

So we feel we're in a pretty good position.

Yes, and I would just say, usually the IT spending cycles go in 3- to 5-year cycle.

So we think we're in the beginning phases of healthy tax spending.

We had a missed upgrade cycle, companies are reinvesting, the tax reform is definitely a financial catalyst.

So we're -- we feel pretty good about the overall environment.

The next question comes from Mike Malouf with Craig-Hallum.

I want to focus first on, it sounds like you guys are going to go after this churn pretty aggressively on the IT Deal Alert side for the smaller customers.

I wonder and if you could talk a little bit more about that.

And then just specifically, how much do you think this is going to cost you in the near term?

And how fast do you think you can affect the churn?

Mike, this is Mike Cotoia.

In terms of the smaller customer, so if we take a step back and we look at the revenue renewal rates for our top 10 and the next 100 customers, those customer segments -- those exceeded 100%.

But we -- as we mentioned in the shareholder letter, we did see some turnover in some churn with the smaller accounts, which really isn't surprising based on the nature and the account makeup.

They may lack resources, infrastructure, technology to help measure some of the investments that they are putting in with us.

So we are laser focused on 3 major investments, as we mentioned in the shareholder letter.

On the product side, we'll continue to launch and develop, what I'd say, are easy-to-use features so that our smaller customers, in particular, can really better measure against their KPIs.

So we're providing them with data and we're integrating a lot of the data with the core solutions.

But being able to show right in the dashboard, how they're doing against this vertical or how they're doing against their ABM strategy, where it's right in front of them with not having to do it manually where they lacked resources is going to be very important.

Number two, we've really enhanced our customer success team, which is really focused on onboarding.

So when we have an account executive sell a Priority Engine deal into an account, the first thing that we'll be able to do now is really surround that account to make sure that the onboarding process is seamless, it's smooth.

And they are really focused on leveraging the 1 or 2 or 3 use cases or best practices in terms of what they really bought Priority Engine for.

So without any of that handoff, it can get a little bit sloppy and people forget what they really did.

So it's very important for that.

And then on the third part, just to dive into this a little bit more, we recently launched a dedicated sales team.

And what we were able to do there -- what we were able to do was reallocate some of our senior sales rep resource internally and have them exclusively focus on renewals and upsells within those accounts.

So we'll always take a look at different pockets where we can reshift and use our own internal resources to do that.

They will work very closely with our client consulting management team hand in hand on that to focus on the renewals and the upsells.

What that will also do is provide our account executives, who sold the initial deals, to have more time to focus on net new pockets within existing accounts as well as net new logos.

And so in terms of cost, it's really not going to cost us a lot of money because we have the resources on hand and we can very quickly shift those resources based on need.

And on timing, in terms of the dedicated sales team, we just watched that a few weeks ago.

And that was very quickly to do, it mobilizes, that's the beauty of the business.

In terms of the product side, it was in our product roadmap, and that will come out in a couple months to really focus on helping our customers really show result and help them measure their result.

So that's really the game plan across those 3.

Yes.

I think that we can see results relatively quickly because we have the formula figured out with our midsize and large customers, where revenue renewal rates are well over 100%.

So we just need to customize a little bit for our smaller customers that don't have the same amount of resources or maybe the same amount of sophistication.

So I agree with Mike, it's not going to cost us much at all.

And I think we're going to be able to see results fairly quickly.

Okay.

Great.

That's really helpful.

And then as you look into IT Deal Alert, the -- so the average of the last 4 quarters was about $13.8 million.

You did sort of at the $14.1 million this quarter.

Has growth sort of plateaued for you on IT Deal Alert?

Or do you see a still a lot of opportunity going forward?

You -- in the past, you used to give us some guidance on growth.

I was just wondering, as you look forward over the next year or 2, do you see that still with some pretty good robust growth?

Mike, this is Mike, again.

I still think there's a lot of opportunity ahead of us.

And we're still, I would say, in the very early innings of having our customers fully transition from the legacy approach to market to being pure data-driven marketers.

And leveraging the #1 piece of data that we happen to own, which is purchase intent insights from our owned and operated sites and our content investments.

The other thing on IT Deal Alert, there's a couple of things that we should peel back.

IT Deal Alert has several different products.

There's qualified sales opportunities, there's deal data, but the flagship product is Priority Engine.

And the Priority Engine solution is what we are really -- we're focused on all of our business but we have a really keen focus on making sure we're integrating our Priority Engine solution into our customers' workflow.

And the Priority Engine revenues year-over-year grew at over 60% and it continue to be very healthy.

The other thing that's important in the Priority Engine side is, that is really the foundation as we transform from a 90-day campaign revenue model to a longer-term subscription model.

And as Greg spoke earlier, 34% of our revenue within the quarter was attributed to longer-term subscription revenue, which was up from 21%.

Lastly, I'd also say that we lead with our data solutions and our data insights.

And our goal is to focus to sell more data, but that will also really support the core offerings.

So their side -- and we're integrating a lot of the data in the core offerings together, because, again, if we see each of those products, which we've said in the past, support each other, understanding the insights and the intent of prioritizing those accounts and then controlling your messaging through content marketing and content syndication and branding, that will start propelling top line growth.

And as you've seen, that results in good margin expansion.

So to answer your question, we still see a lot of upside on this, but there's a lot of integration, there's a lot of focus on long-term contracts, and we're still in the early stages of this data transformation.

The next question comes from Marco Rodriguez with Stonegate Capital Markets.

Kind of wanted to follow up on the last question just in terms of the IT Deal Alert customers and your traction there.

I believe in the shareholder letter, you mentioned some of facts in the quarter where some of your larger customers shifted spend from IT Deal Alert to Core Online.

Was that something that was sort of expected?

Is that sort of a trend you might be expecting to happen in the second half for the year?

Can you kind of help us think through that?

Sure.

Marco, what we saw in Q2, where some of our top 10 global accounts shift some of their spend from IT Deal Alert to Core.

But more specifically, we saw a shift in the Qualified Sales Opportunity investment, which was, at that point in time, contracts and we feed to the inside sales team that those are confirm projects out in the market.

And what we've seen is, when the IT environment increases and the budget's increased for those large global accounts, they will take some of those dolls and what they really want to do is, because they are big name brands, they want to control the messaging.

So they'll shift and they'll start really investing heavily in content syndication and branding and content marketing.

So we saw their overall growth year-over-year was 19%.

Where we saw the shift though was from the Qualified Sales Opportunity product into Core, and the Priority Engine long-term subscription revenue over to Core.

And that's -- it's not surprising because when they get an increase in budget, as long as we're capturing the increase overall, we're okay with some of that shift.

Because, again, it helps us with our gross margins and our margin expansion.

Okay.

Got you.

So that margin or that mix shift, if you will, that's the main driver for the 77% gross margin you saw in the quarter?

Well, the main driver of that is revenue and our operating leverage.

So we have a fixed-cost model and anytime we exceed the revenue numbers, it'll expand on our margin.

And we have a very -- it's been typically 74%, 75% when we beat the numbers and have top line growth, we -- it results in margin expansion to the 77% this quarter.

Got you.

Okay.

And then shifting again here also to some of the other comments you had in your shareholder letter in terms of the incremental margin, the EBITDA margin.

You talked about seeing upside to that 50% to 60%.

Are you saying that maybe you come to the higher end of that range?

Or is the business model in some form kind of changing?

No, we've always had -- we've always projected that our incremental EBITDA margin would range between 50% and 60%.

Again, because of the operating leverage that's built into the company, anytime that we see the revenue levers increase, those dollars can drop right to the bottom line.

So we saw an 80% increase in incremental EBITDA margin year-over-year and over 90% sequentially.

Because it doesn't cost us anymore.

We have the content, we have the data.

So if we increase our revenue output, it's not impacting our cost of sales per se, and that increase in revenue is going to drop right to the bottom line.

Got you.

Understood.

But I guess, what I'm trying to figure out or understand is if there's a certain point where you need to invest back into the company to support the growth that you're seeing, and how that kind of impacts your incremental EBITDA margin going forward?

Yes, so this is Greg.

So basically what we do is at the beginning of the year, well -- you have a revenue forecast.

And then we'll take 50% to 60% of that amount and we'll drop it to the bottom line.

And then another 40% to 50% as our reinvestment budget.

So we continue to reinvest aggressively in the business.

But as we go through the year and we exceed that forecast, we don't need to increase the reinvestment budget.

So those incremental dollars fall to the bottom line at a very high rate.

So that's the one thing.

The second thing, why the margins will increase over time?

If -- as revenue starts growing in bigger amounts, it's not always a larger percentage.

You might be investing $5 million out of $10 million, it would be 50%.

But if we think revenue is going to grow $50 million, we grow $5 million.

Just as the numbers scale, the incremental margins get larger.

And as the numbers scale, our gross margins expand as well.

And that's why you're seeing such a dramatic increase on the adjusted EBITDA line, because we're basically a fixed-cost model with very little incremental cost of goods and the money just flows to the bottom line at a very high rate across the board.

So that's certainly one thing that we're hearing a lot from why investors are interested in the stock is because of the expanding margin profile of the business model.

This concludes our question-and-answer session.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.